PPT_MIDTERM II-1

Page 1: Overview

• Holy Angel University

• School of Business and Accountancy (SBA)

Page 2: Financial Statements Overview

• Focus on financial statements, cash flow, and taxes related to businesses.

Page 3: Learning Outcomes

• Describe the basic financial information produced by corporations.

• Explain the influence of financial statements on stakeholders.

• Discuss financial statement analysis and its importance.

• Identify potential problems with financial statement analysis.

Page 4: Financial Statement Analysis

• Evaluate a firm’s financial position.

• Identify strengths and weaknesses.

• Suggest actions for wealth maximization.

Page 5: Annual Report Components

• Discussion of Operations (Chairman's letter)

• Financial Statements:

  • Income Statement

  • Balance Sheet

  • Statement of Cash Flows

  • Statement of Retained Earnings

Page 6: Types of Financial Statements

• Balance Sheet

• Income Statement

• Statement of Cash Flows

• Statement of Retained Earnings

Page 7: The Balance Sheet

• Shows assets and financing on a specific date:

  • Assets

  • Liabilities

  • Equity (Capital)

Page 8: Balance Sheet Details

• Cash & equivalents vs. other assets

• Accounting methods (FIFO/LIFO) differences

• Breakdown of common equity account: common stock, paid-in capital, and retained earnings.

• Differences between book values and market values.

Page 9: Unilate Textiles Balance Sheet Instruction

• Financial data on balance sheets for years 2012 and 2011 in millions. Breakdown of assets and liabilities and equity.

Page 10: Additional Balance Sheet Information

• Net working capital = Current Assets - Current Liabilities.

• Net worth calculated by subtracting total liabilities from total assets.

Page 11: The Income Statement

• Summarizes business operations for a specified period, listing revenues and expenses.

Page 12: Unilate Textiles Income Statement

• Net sales, operating costs, and net income for years ending December 31, 2012 and 2011.

Page 13: Statement of Cash Flows

• Shows how operations affect cash position.

• Insights into investment and financing decisions.

Page 14: Unilate Textiles Cash Sources and Uses

• Analysis of cash positions from 2011 to 2012, detailing sources and uses.

Page 15: Cash Flow Summary

• Breakdown of cash flow from operations, long-term investing activities, and financing activities.

Page 16: Statement of Retained Earnings

• Changes in common equity from balance sheet dates.

Page 17: Unilate Textiles Retained Earnings Statement

• Retained earnings balance as of December 31, 2011 and 2012 with dividends paid out.

Page 18: Key Financial Metrics for Investors

• Definitions and formulas for key financial measures including Net Working Capital, Operating Cash Flow, Free Cash Flow, and Economic Value Added.

Page 19: Financial Ratio Analysis

• Uses relative values for accounting numbers.

• Designed to show relationships within and between firms.

Page 20: Purpose of Ratio Analysis

• Evaluate company performance; facilitate comparisons; highlight strengths and weaknesses.

Page 21: Major Categories of Ratios

• Liquidity: Ability to meet obligations.

• Asset Management: Effectiveness in managing assets.

• Debt Management: Mix of debt and equity.

• Profitability: Overall financial health.

• Market Values: Relation of stock price to earnings.

Page 22: Current Ratio and Quick Ratio

• Current Ratio Formula: Current Assets / Current Liabilities.

Page 23: Unilate's Current Ratio Calculation

• Current Ratio = $465.0M / $130.0M = 3.6x.

• Comparison with industry average of 4.1x.

Page 24: Unilate's Quick Ratio

• Quick Ratio = (Current Assets - Inventories) / Current Liabilities = 1.5x.

• Industry average: 2.1x.

Page 25: Liquidity Position Analysis

• Suggests that Unilate's liquidity position is relatively poor.

Page 26: Asset Management Ratios Overview

• Inventory Turnover Ratio, Days Sales Outstanding (DSO), Fixed Assets Turnover Ratio, Total Assets Turnover Ratio.

Page 27: Unilate's Inventory Turnover Ratio

• Inventory Turnover = Cost of goods sold / Inventory = 4.6x.

• Industry average: 7.4x.

Page 28: Days Sales Outstanding Calculation

• DSO = Accounts Receivables / Daily Sales = 43.2 days (Industry average: 32.1 days).

Page 29: Fixed Assets Turnover Ratio

• Fixed assets turnover = Sales / Net fixed assets = 3.9x.

• Industry average: 4.0x.

Page 30: Total Assets Turnover Ratio

• Total assets turnover = Sales / Total assets = 1.8x.

• Industry average: 2.1x.

Page 31: Debt Management Ratios Overview

• Includes Debt Ratio, Times-Interest-Earned Ratio, Fixed Charge Coverage Ratio.

Page 32: Unilate’s Debt Ratio Calculation

• Debt Ratio = Total liabilities / Total assets = 50.9%.

Page 33: Times-Interest-Earned Ratio Calculation

• TIE = EBIT / Interest charges = 3.3x.

• Industry average: 6.5x.

Page 34: Fixed Charge Coverage Ratio Calculation

• Fixed Charge Coverage = (EBIT + Lease payments) / (Interest Charges + Other Payments) = 2.2x.

• Industry average: 5.8x.

Page 35: Profitability Ratios Overview

• Includes Net Profit Margin, Return on Total Assets, Return on Common Equity.

Page 36: Unilate’s Profit Margin Ratio

• Profit margin = Net Profit / Sales = 3.6%.

• Industry average: 4.9%.

Page 37: Unilate’s Return on Total Assets

• Return on Assets = Net income / Total assets = 6.4%.

• Industry average: 10.3%.

Page 38: Unilate’s Return on Common Equity

• Return on Common Equity = Net income / Common equity = 13.0%.

• Industry average: 17.7%.

Page 39: Market Value Ratios Overview

• Includes Price/Earnings Ratio and Market/Book Ratio.

Page 40: Unilate’s Price/Earnings Ratio

• Price/Earnings Ratio = Price per share / Earnings per share = 10.6x.

• Industry average: 15.0x.

Page 41: Unilate’s Market/Book Ratio

• Market/Book Ratio = Market price per share / Book value per share = 1.4x.

• Industry average: 2.5x.

Page 42: Summary of Ratio Analysis

• DuPont Analysis links Net Profit Margin, Total Assets Turnover, and Return on Assets (ROA).

Page 43: Rate of Return on Common Equity

• ROE formula utilizing ROA and equity multiplier.

• Calculation indicates ROE at 13.0%.

Page 44: DuPont Equation Overview

• Analyzes profitability, expense control, and asset utilization.

Page 45: Problems with Financial Ratio Analysis

• Challenges in comparison, inflation effects, seasonal distortions, and accounting variances.

Page 46: Financial Information Requirements for Public Companies

• Discussing required financial disclosures for stockholders across balance sheet, income statement, and cash flows.